Sunday, March 08, 2009

unemployment 101

Capitalism is based on buying and selling commodities in the marketplace. Labour power is just another commodity to be bought and sold by capitalists. Labour power is essential for the production of other commodities.

A commodity is simply something that can be bought or sold.

If commodities can’t be sold (such as houses or cars at the moment) then capitalists will stop making them and stop or slow down buying the materials used to make them. If labour power cannot be used then capitalists will lay off (sack) workers or not employ new workers. Labour power is subject to supply and demand since it is just another commodity.

There is never full employment or guaranteed work under capitalism because labour power is just another commodity. Just as there is no guarantee that someone will buy a car from General Motors today there is also no guarantee that some capitalist will employ a particular worker. That is how a market economy works. If there was zero unemployment then workers could bargain for higher wages up to the point where the profits of the capitalist would become minimized. So, it is important for capitalism to always have some unemployment or a reserve army of labour to keep wages in check.

In Australia, we have had chronically high unemployment for many years now (since 1974). As a teacher in disadvantaged schools I have seen the effects of generational unemployment (parents don’t have jobs and kids don’t aspire to have a job) and concentrated unemployment (in some housing trust areas no one in the street works). People can survive on welfare these days but some of them don’t value education or aspire to employment. Generational welfare dependency can be very ugly

The capitalist system can still function “normally” while unemployment remains within limits (say, below 5%).

At the moment we have a recession (defined as two quarters of zero or negative growth) where buying and selling at the marketplace grinds to a halt. The means of production are still there, in those industries which are sacking workers. In the abstract it is still possible to make products and distribute them to people who want them but since they can’t be bought or sold, since we live in a market economy, then that will not happen.

Historically, other social systems have not had unemployment, they have not had the concept of unemployment. There may be all sorts of other problems with these social systems but unemployment is not one of them. Hunter-gatherer Aboriginal society in Australia, before whites arrived, did not have any unemployment. Slave society and feudal society did not have unemployment. There was no unemployment in the socialist Soviet Union during the 1930s Great Depression. In many science fiction future scenarios there is no concept of unemployment.

update 8th March: There is no unemployment in the Free Software industry whose products power the internet (LAMP).

Unemployment is part and parcel of the market economy, an essential feature. But obviously, these are not normal times, unemployment is rapidly increasing. This requires further explanation. Why has the normal arrangement of relatively low unemployment broken down?

6 comments:

5% is considered historically to be "full employment" in the U.S., in terms of employers and employees being able to find each other reasonably well. It's always nice though when it drops below that if you're a worker. So I'm puzzled why there's generational unemployment in Australia with a rate of 4.8%. Are there people being excluded from the market due to racism?

The Bureau of Labor Statistics in the U.S. keeps track of the number of people who are unemployed and not looking for work. They are considered "inactive" or "discouraged" workers, and are not counted in the unemployment statistics. However if they look for work and claim unemployment benefits while looking, then they get counted. Perhaps this is the situation in Australia?

First of all the level we have is not unprecedented. Unemployment got up to 10.8% in the early 1980s. I'd say the reason for the increasing unemployment now is that an essential feature of our economy in the U.S. has broken down: namely credit due to a breakdown in our banking system. Most of our monetary system is based on credit. If the credit system stops, the economy here naturally contracts. The banking system is still "stuck" at this point.

Many employers borrow money in order to make payroll. If they are unable to get access to credit they have no choice but to lay off workers, even if there is sufficient demand for their product or service. This creates dislocations, because employers and employees stop buying in the general marketplace. This creates problems for other businesses that might've survived the credit crunch, because of course their revenue is dependent on sales.

The fact that our monetary system is essentially based on credit has long struck me as a fundamental flaw in our economic system, because the economy is rather like an object in orbit around a planet: always falling towards it, but missing, until of course something happens to make its orbit degrade, and the danger increases that it will "crash". The economy in this structure by its nature must create a deficit. The only way it stays alive is if people in the economy keep borrowing as much or more money than is being used to pay off debt.

The economy can't grow forever, because eventually it runs out of value-added opportunities for growth, or the banks reach their lending limits. The way the economy typically handles this is it goes into a "garden variety" recession. Banks stop lending as much, and then we go into a cycle where more money is being used to pay off debt than is being loaned out. Some debts end up being defaulted on. People lose jobs because there's less growth in the economy as a result.

Once new value-add opportunities arise and/or credit becomes more available then banks start lending more, and the economy grows again.

What's happened this time is that the very mechanism that promotes economic growth is broken. Until that gets fixed this economy is not going anywhere.

There are suburbs in Adelaide such as Smithfield Plains to the north and Mansfield Park to the west where unemployment rates are very high and have stayed high for years. I've worked in schools near both of these areas and have seen the effects on kids. Once the pattern is established it is hard to break and the service industries (schools, social workers) are not provided with the resources to make a big impact into it. The government goal always seems to be to manage the problem, not to solve it.

I did a quick google search "australia generational unemployment" and found a couple of articles quickly which confirmed the existence of such pockets all around in Australian big cities.

As well, there are remote and some suburban aboriginal communities that are far worse. I've written about this in my blog from time to time.

Welfare may be easier to obtain in Australia than in the USA

I'm not certain about how the statistics are kept in Australia.

I hope to cover some of the other points you mention in other articles. I like your planet in orbit but in danger of crashing metaphor of the economy.

I was talking to a friend recently who is from Germany. I had heard/read somewhere that Germany's unemployment figure was much higher than what the present Australian figure was at the time. I asked my friend about this and he gave an interesting answer.

My friend said that in Australia, and probably other countries, we play some tricks with our unemployment figure. In particular he said anyone who is considered long term unemployed is removed from the Australian figure. Germany's unemployment rate will always be higher because they apparently don't do this.

If this is the case I can see how our low unemployment rate could mask the true picture of the generational long term unemployed in Australia.

Easy on the Marxist rhetoric there...workers are responsible for selling their own labor, at least in the economy I live in. No one tells me who I work for...and sometimes I employ myself.

Absolute total unemployment is easy...just take the total number of people and subtract the number of employed (categorized probably by tax return)...but that is not very useful as an economic statistic. As a result, economists divide up (un)employment into several types...of course the economic school one subscribes to changes aspects of the divisions.

There will always be some people currently unemployed for a short time just because finding a new job takes time, even when times are good. Them and those employed in seasonal work (crab fishing, etc.) is what economists call "Frictional Unemployment". That is a permanent feature of an economy and is usually a few percentage points. It is considered nothing to worry about unless there are dramatic changes.

"Structural unemployment" is a more worrisome phenomenon. It is the mismatch between available jobs and the available skills of the workers. This takes longer to remedy via retraining programs, etc. There is a danger that someone in this category will decide that the effort isn't worth it and stop trying which moves them out of the labor force.

Structural and frictional employment, taken together are considered to make up the natural rate of unemployment. In the U.S., this rate is considered to historically be between 4% and 7%. In any economy that is not static you will have these forms of unemployment to some level, though it may be masked by policies.

Part of the confusion is because the employment statistics really divide into three bins and not the obvious two: Employed, Unemployed and Not in the Labor Force.

In most of the unemployment statistics I've seen for 1st world nations, "unemployed and not looking for work" is considered to be Not in the Labor Force. There is the natural complaint that they should be counted as unemployed...but the problem is we don't know why they left or never entered the labor pool. Maybe they won the lottery, maybe they got married to a better off spouse, maybe they became disabled, and maybe there was no work to be had and they became discouraged.

Unemployed and looking is, at least, an easy number to actually determine to a reasonably small error and is economically significant when figuring out just how much labor pool there is.

There are discouraged worker statistics where they consider the number of those who were looking for work, have not found work and have stopped looking for work within the last N months. That appears to be used as an economic signal by the statisticians and is what I'd want to track if I was trying to determine the current economic trends.

In the case of hunter-gathers, there is employment, unemployment and not-in-the-labor-pool. Unemployment was very small...if yo didn't work you probably died. You did what was necessary to support your people and spent the balance of the time resting for the next round. Not-in-the-labor-pool existed: small children, people currently ill, etc. No significant surplus was generated or stored. Also, cultural reasons usually kept significant innovation from arising.

In the 30s Soviet Union, they had "full employment" because 1) there was just so much to do to build a modern economy from the mess after the revolution that everybody could have some job and 2) the statistics from the Soviet Union or any fully command economy are completely untrustworthy and often meaningless. If I tell you that your "job" is to sit around the house and count the ceiling tiles...you're employed! No matter that there is no check on the economic meaningfulness of the so-called employment. In a market economy, if your work output is no longer valued by buyers, then you are in danger of being unemployed.

I will ignore the SF scenarios except to note that in most of the utopian ones, most of not all people except the machines are not-in-the-labor-pool as there is enough surplus produced to support everybody materially. I expect that in this kind of scenario people would trade using some value system other than material goods, such as status and reputation...which could easily lead to variations of the same three categories.

Slave societies are different because the slaves are regarded as property, not people. This is also true to a lesser extent of the peasants in feudal societies. On the other hand, if you look at the behavior of the independently economically acting agents in these systems (slave owners, peerage, etc.) you'll see that again the same 3 divisions emerged. It was less important as they had some surplus from their subservients to support those who were "unemployed".

I think you are stretching the meanings of the categories "Employed, Unemployed and Not in the Labor Force" too far. For example you could instead use the terms productive, unproductive and not trying. Or in a knowledge society: good learners, poor learners and non learners. It might be one of those sorts of discussions where arguing the categories represents an underlying attachment to something (the market) that is not a permanent feature of society - past or future.

I thought about your comment (and reread it) over a few days. Due to general business and priorities I haven't researched the nature of different societies in any more detail but would certainly see that as a very useful thing to do.